Fidelity Southern Corporation, holding company for Fidelity Bank, reported net income of $12.4 million, or $0.46 per diluted share for the quarter ended December 31, 2017, compared with $7.9 million, or $0.30 per diluted share, for the quarter ended September 30, 2017. For the year ended December 31, 2017, the Company reported net income of $39.8 million, or $1.49 per diluted share, compared with $38.8 million, or $1.50 per diluted share, for the same period in 2016.

Fidelity's Chairman, Jim Miller, said, "With a little help from Washington, we made a lot of money as our "old" strategy played out in 2017. That strategy was modified beginning early in 2017. Interest rates are the reason. However, destructive interest rate competition in commercial credits has only now abated and our ability to compete is here. Our efforts did pay off in the 4th quarter. Much more is to come as the loan portfolio is rebalanced to higher income commercial credits as consumer lending is deemphasized to meet today's reality."

President Palmer Proctor added, "We have created good momentum this year in positioning the bank for future organic growth from our commercial bank and mortgage businesses, becoming more efficient and effective in all we do, and being ready for any strategic opportunities that may arise. We are very pleased with the 20% annual growth in our demand and money market deposits, continued improvements in our asset quality, and the 9% or $1.15 per share growth in our tangible book value. We are optimistic about 2018."

RECENT EVENTS 
As a result of the Tax Cuts and Jobs Act that was enacted into law on December 22, 2017, Fidelity revalued its net deferred tax liability position to reflect the reduction in the federal corporate income tax rate from 35% to 21%. This revaluation resulted in a one-time income tax benefit of approximately $4.9 million, or $0.18 of diluted earnings per common share, for the fourth quarter of 2017.

BALANCE SHEET 
Total assets grew by $71.4 million, or 1.6%, during the quarter, to $4.6 billion at December 31, 2017, compared to $4.5 billion at September 30, 2017, primarily due to increased loan production of $188.7 million, partially offset by a decrease in cash of $125.7 million during the quarter. Demand and money market deposits grew by $27.4 million, but this increase was partially offset by a seasonal decrease in time and savings deposits of $98.6 million, for a net decrease in deposits of $71.2 million during the quarter.

Short-term FHLB borrowings and securities sold under repurchase agreements increased by $135.8 million, due to the increased loan production and lower deposit funding. In addition, other liabilities decreased by $6.8 million, or 15.6%, due primarily to the revaluation of the deferred tax liability at December 31, 2017, as discussed in the Income Taxes section below.

Total assets grew by $187.2 million or 4.3%, to $4.6 billion at December 31, 2017, compared to $4.4 billion at December 31, 2016. Primary drivers of the year over year change were loan growth of $171.1 million, or 4.5%, funded by total deposit increases of $236.6 million, or 6.5%, which allowed the Company to eliminate $92.8 million, or 38.1%, of short-term borrowings, as compared to December 31, 2016.

Loans 
Total loans of $3.9 billion at December 31, 2017, increased by $188.7 million, or 5.0%, as compared to September 30, 2017. Increases of $106.5 million in indirect loans, $19.6 million in commercial/SBA loans, and $40.6 million in mortgage loans were noted in the quarter. Indirect loan production increased by $88.9 million, or 34.7%, in anticipation of indirect loan sales in the first half of 2018. Loans held-for-sale increased by $17.4 million, as the pipeline for expected loan sales was raised for the quarter.

Total loans increased by $171.1 million, or 4.5%, compared to December 31, 2016. An increase in mortgage loans of $134.7 million accounted for most of the increase, primarily due to lower sales of mortgage loans of $226.6 million in 2017. Commercial and construction portfolios also experienced growth year over year.

Asset Quality 
Asset quality remained strong as evidenced by the reduction in non performing assets, excluding the guaranteed portion of SBA and GNMA loans ("adjusted NPA's") and acquired loans.  Adjusted NPA's, a non-GAAP measure, decreased by $4.6 million, or 11.5%, during 2017. The reconciliation to the comparable GAAP measure is included in the schedules accompanying this release.

On a linked-quarter basis, the provision for loan losses decreased by $1.4 million, while net charge-offs were flat. Gross charge-offs increased by $1.6 million, offset by an increase in gross recoveries of $1.8 million, on a linked-quarter basis, mainly due to charge-offs of specific reserves established in prior quarters on several C&I loans to operating companies.  Annualized net charge-offs remained relatively flat at an increase of 0.1% of average loans. No provision for loan losses was recorded in the fourth quarter due to elevated loan recoveries.

Compared to 2016, the provision for loan losses for the year decreased by $4.0 million, reflecting strong asset quality.

Fair Value Adjustments 
Loan servicing rights increased by $725,000, or 0.6%, to $112.6 million at December 31, 2017, compared to $111.9 million at September 30, 2017, and by $13.3 million, or 13.4%, compared to December 31, 2016. Mortgage servicing rights ("MSRs"), the primary component of loan servicing rights, contributed the majority of the change, increasing by $1.6 million and $14.5 million during the quarter and year, respectively.

New loan servicing rights capitalized on sales of mortgage loans with servicing retained decreased by $1.7 million, or 19.8%, for the quarter but increased $766,000, or 2.7%, for the year. Capitalized servicing decreased on a linked-quarter basis due to the seasonality of mortgage production. Historically, production begins to decrease after the strong summer buying season. Capitalized servicing increased for the year even though sales of loans with servicing retained decreased by $305.2 million, or 12.1%, for the year because, as a result of rising interest rates, servicing rights are expected to remain in the portfolio longer, leading to higher projected expected lives. The decrease in sales of loans sold servicing retained was primarily due to fewer originated mortgages from refinance transactions, as year over year, we originated $513.3 million, or 55.7%, fewer refinance loans. This was partially offset by increased volume of purchase money mortgages and new market expansion.

Amortization of MSRs was flat for the linked-quarter, increasing by $48,000, or 1.4%, but was $1.6 million, or 10.2%, lower in 2017 compared to the prior year. The annual decrease is primarily the result of lower actual and predicted early prepayments in 2017, compared to 2016, as a result of the relatively more stable interest rate environment in 2017.

MSRs impairment of $1.5 million was recorded during the quarter, an increase of $932,000, or 171.2%, compared to the prior quarter. The increase in impairment was primarily related to higher actual early prepayments, and higher expected future delinquent servicing costs. Higher future servicing costs are expected as the Company continues to adapt to and implement increased regulatory requirements and as the average age of the serviced portfolio grows.

The current estimated fair market value of the MSRs was $103.7 million at December 31, 2017, an excess of $3.0 million over the net carrying value recorded. If interest rates trend upward, the fair market value would theoretically increase with a corresponding decrease in early prepayment expectations and some portion of the cumulative impairment recorded may be recovered. However, the value of the MSRs is highly dependent on current market rates so any interest rate volatility could significantly impact the value of the asset and the recorded impairment, either positively or negatively.

Fair value gains on the portfolio of mortgage loans held for sale, interest rate lock commitments ("IRLCs") and hedge items were $10.3 million at December 31, 2017, a decrease of $1.3 million, or 11.5%, for the quarter. The decrease was primarily attributable to a decrease in the gross pipeline of locked loans to be sold during the winter months, historically a lower buying season and one of the lowest production periods of the year. In the future, slower winter seasonality should be partially offset by continued expansion into Florida markets, where winter home buying is stronger than in other markets. Since the Bank hedges its mortgage pipeline and held for sale portfolio, the volatility of these items due to interest rate movements collectively should be minimal.

Deposits 
Fidelity continued to focus on core deposit growth as demand and money market deposits grew by $27.4 million, or 1.1%, to $2.6 billion, during the quarter, and by $445.0 million, or 20.4%, in 2017. Florida total deposits increased by $10.8 million, during the quarter, and $241.7 million in 2017. Noninterest-bearing demand deposits ended 2017 at a record level of $1.1 billion, an increase of $12.9 million, or 1.2%, for the quarter and $160.7 million, or 16.7%% in 2017.

Increases in demand and money market deposits were partially offset by decreases in savings deposits of $33.1 million and $81.0 million and time deposits of $65.5 million and $127.4 million, for the quarter and year over year, respectively. The enhanced core deposit base allowed the Bank to be more relationship-oriented in its approach to time deposits and non core brokered CD's which decreased by $30.6 million and $64.5 million, for the quarter and year over year, respectively.

INCOME STATEMENT

Net Income 
Net income was $12.4 million, or $4.5 million more than the previous quarter. The increase in earnings was driven by an increase in net interest income of $2.5 million, primarily due to an increase in loan yield and average loans, the aforementioned decrease in provision for loan losses, and a $5.4 million decrease in income tax expense, including a one-time tax benefit of $4.9 million as a result of the revaluation of the net deferred tax liability, as discussed in the Income Taxes section below.  The increases in net income driven by these items were partially offset by lower noninterest income of $4.8 million, primarily led by mortgage lending activities as a result of lower originations and loan sales due to seasonality.

Net income was $39.8 million for the year, an increase of $1.0 million, or 2.7%, as compared to the same period in the prior year, primarily driven by higher net interest income of $6.4 million, lower provision for loan losses of $4.0 million, offset by lower noninterest income of $6.4 million, and higher noninterest expense of $9.9 million. In addition, income tax expense was $6.9 million lower in 2017, including the one-time benefit discussed above. 

Interest Income 
Interest income of $41.7 million for the quarter increased by $2.5 million, or 6.7%, compared to the prior quarter, primarily driven by an increase of 17 basis points in the yield on loans and an increase in average loans of $106.5 million.  Interest income on loans for the quarter included $1.2 million in accretable yield earned on the purchased credit impaired ("PCI") loan portfolio, which accounted for 7 basis points of the increase. Management does not believe that the increase in the accretable yield recognized during the quarter is reflective of a trend that will continue in future quarters.

This increase was partially offset by a decrease in interest income from excess fed funds sold and interest-bearing deposits with banks of $230,000, or 2 basis points for the quarter as excess funds were used to pay down short-term borrowings.

As compared to the same period in the prior year, interest income increased by $3.4 million, or 8.8%, as the yield on loans increased by 25 basis points, primarily in the commercial, construction, and mortgage loan portfolios, including an increase of 7 basis points attributable to accretable yield.

Interest income was $158.0 million for the year, an increase of $8.7 million or 5.8%, compared to the same period in the prior year, primarily due to an increase of 5 basis points in the yield on loans and an increase in $139.1 million in average loans.

Interest Expense 
Interest expense of $5.8 million, increased slightly by $68,000, or 1.3%, for the quarter, primarily due to a 1 basis point increase in deposit expense for the quarter. As compared to the same periods in the prior year, interest expense increased by $427,000, or 8.0%, for the quarter, and by $2.3 million, or 11.2%, year over year, as market rates and balances on deposits increased over the past twelve months.

Net Interest Margin 
The net interest margin was 3.42% for the quarter compared to 3.20% in the previous quarter, an increase of 22 basis points.  The yield on total average earning assets increased from 3.75% to 3.97%, offset by a slight increase in the yield on total interest bearing liabilities of 1 basis point to 0.78%. Average loans increased by $106.5 million with a 17 basis point increase in yield, due to higher yields on indirect lending, mortgage and commercial/SBA loans, including an increase of 7 basis points in accretable yield on PCI loans. Management does not believe that the increase in the accretable yield recognized during the quarter is reflective of a trend that will continue in future quarters.

Average interest-bearing liabilities decreased by $6.0 million, primarily driven by a decrease in average time deposits, partially offset by increases in average demand and savings deposits, as the Bank focused on core deposit growth, and the previously discussed increase in borrowings for the quarter to fund loan growth.

As compared to the same period a year ago, the net interest margin for the quarter, increased by 17 basis points to 3.42% from 3.25%, primarily due to a 25 basis point increase in the yield on earning assets, offset by an increase in the yield on total interest-bearing liabilities of 7 basis points from 0.71%. Higher yields on earning assets included an increase of 7 basis points in accretable yield on PCI loans.  Average earning assets increased by $117.0 million, primarily due to an increase in average loans over the year and and the excess cash generated over the year by the increase in deposits. Average interest-bearing liabilities decreased by $53.1 million, primarily driven by an decrease in average borrowings of $264.1 million, offset by an increase in average interest-bearing deposits of $210.9 million.

Noninterest Income 
On a linked-quarter basis, noninterest income decreased by $4.8 million, or 10.1%, largely due to a net decrease in income from mortgage banking activities of $4.1 million, or 11.0%, including a $1.5 million MSRs impairment. Marketing gains and origination points and fees decreased primarily due to lower mortgage production, which decreased $83.1 million, due to seasonality of mortgage production, and a lower pipeline of locked loans to be sold, which decreased by $61.5 million, or 23.2%, during the quarter. In addition, mortgage loan sales decreased $129.4 million, or 17.7%, during the quarter. SBA lending activities income decreased by $879,000, due to lower gain on loan sales and increased held for sale balances, and other income decreased by $560,000, a direct result of lower gains on OREO sales. Offsetting these decreases, indirect lending activities income increased by $665,000, led by an increase in indirect loan sales of $32.6 million, resulting in higher gain on sale of $269,000 and an increase in capitalization of servicing rights of $224,000 as the Company retained the servicing on those sales.

Compared to the same period a year ago, noninterest income for the quarter of $28.9 million decreased by $18.3 million, or 38.7%, primarily due to a net decrease in income from mortgage banking activities of $16.5 million, or 44.1%, stemming from a change in MSRs impairment/recovery of $14.6 million.

Noninterest income was $135.0 million in 2017, a decrease of $6.4 million, or 4.5%, compared to the prior year, primarily due to decreases in income from mortgage banking activities of $2.8 million, indirect lending activities of $2.4 million, and SBA lending activities of $1.1 million. Year over year changes are primarily the result of lower MSRs recovery and gain on asset sales.

Noninterest Expense 
On a linked-quarter basis, total noninterest expense increased by $73,000, or 0.1%, for the quarter, primarily due to an increase in fraud and other losses of $587,000, loan origination expenses of $383,000 and $284,000 in OREO property tax expense. These increases were offset by a decrease in salaries and employee benefits, and commissions of $1.4 million, or 4.0%, due to a decrease in commissions of $797,000 relating to lower mortgage loan production for the quarter. Salaries decreased by $586,000, primarily due to decreases in temporary help, overtime, 401K expense, and supplemental retirement expense.

Compared to the prior year quarter, noninterest expense of $52.9 million decreased by $1.3 million, or 2.3%. Salaries and employee benefits, and commissions decreased by $1.1 million, or 3.2%, compared to the same quarter in 2016, due primarily to a decrease in commissions as mortgage loan production was lower in 2017 than 2016.

Noninterest expense of $210.9 million increased by $9.9 million, or 4.9%, year over year. The increase in noninterest expense was related to organic growth in the mortgage and Wealth Management divisions, and expense related to our operational excellence initiative launched earlier in the year. Salaries and employee benefits, and commissions increased by $7.3 million, or 5.6%, for the year, mainly due to an increase in the FTE count of 109, or 8.5%, primarily due to growth in our mortgage and Wealth Management businesses. Professional and other services also increased by $3.1 million, or 20.5%, primarily due to increased expenses paid to outside third parties for infrastructure improvement projects and costs associated with new and existing regulations. Fidelity remains committed to implementing changes to operations and technology that will enable the Bank to be more efficient and effective in its growth strategies.

Income Taxes 
The Tax Cuts and Jobs Act enacted on December 22, 2017 included, among other things, a reduction in the federal corporate income tax rate from 35 percent to 21 percent from the beginning of the tax year 2018. The income tax rate change will favorably impact Fidelity's effective tax rate going forward.

As a result of the rate change, Fidelity revalued its net deferred tax liability at December 31, 2017 which reduced income tax expense by $4.9 million for the quarter. The main component of Fidelity's net deferred tax liability position is the timing of MSRs income recognition which resulted in an $11.2 million tax benefit, partially offset by tax expense of $5.9 million to revalue future deductions related to the loan loss allowance and employee compensation programs at the lower corporate income tax rate going forward.

Excluding the effects of the one-time tax benefit recorded to revalue the net deferred tax liability and the benefit of discrete items recorded during the quarter for employee stock option exercises, the effective tax rate was constant compared to the prior quarter at 38.3%.

The one-time tax benefit recorded during the quarter to revalue the net deferred tax liability represents a reasonable estimate determined by management. Any adjustments to provisional amounts determined during the measurement period will be reported as an adjustment to income tax expense or benefit in future periods.

The revaluation of the net deferred tax liability as a result of the rate change does not have any cash flow effect. Additionally, the change in the tax rate does not impact the time frame when the net deferred tax liability is expected to be settled.